Introduction

Payday loan is a borrowing which is to be paid back at a high rate of interest, credited to the borrower on the basis of his/her income and credit profile for a short-period of time.

Indian Scenario

Indian market in the previous couple of years has seen a rise in startups in the payday space. According to a report, such rise was seen in the year 2016 when around 30 of them mushroomed. Currently there are 84 startups in the payday loan services sector. These startups come under the definition of Non-banking Finance Companies (NBFC). NBFCs are the companies which indulge in the business of banking finance but without meeting the legal definition of  a bank.

Growth factor

The sudden growth in this sector is due to the change in the borrowing habits of the young earning people of the country. We have manier times heard people saying it’s the end of the month I don’t have money. This is mainly a problem with the young people who have several expenses lined up before the salary is credited to their bank account. Seeing this as an opportunity these startups are aimed to provide loan for short period of time which can be paid by the lendee when he receives his next paycheck. People have started using these service in order to deal with so called “month end” money problem. The demonetisation also helped these service grow in the Indian market.

There is another reason why these loans are preferred by the young members of the society as they are meeting the fast and metro life requirements, the instant requirement of money may be due to some short term emergency which can not be fulfilled by the banks due to the lengthy loan approval process. These startups which are wholly digitised, provide loan within minutes to the applicant. The other plus point of the payday loan is that the amount can be less as INR 10,000 for which the banks do not provide loans but these startups do.

In order to fulfill the fast money requirements of the customers the loan approval process is fully automated which is based on an algorithm which assess the applicant’s credit worthiness and grants loan within not more than 8 minutes.

How to apply for a payday loan in India

For applying for payday loan in India the applicant has to furnish the following

1. Age Proof
2. Proof of active bank account
3. Proof of income
4. A valid phone number
5. Pan card number

Online service are available for applying for payday loan. The principal amount is a percentage of his salary or the next paycheck which the applicant will be receiving according to the  proof of income furnished by the applicant. This is to make sure that the applicant is able to pay the amount as there is no other collateral that the lender requires the applicant to submit. Once the application is approved it only takes few minutes for the amount to be transferred to the account of the applicant registered with the service provider.

Laws in United Kingdom

Pre 2014 there were no laws in the UK for payday loans due to which the country saw a huge growth in this sector as the lenders charged the borrowers with high rate of interest. In the year 2014 the English parliament gave the power to the  Financial Conduct Authority (FCA) to regularise the payday lending in the country. In regard of the same in the year the FCA cut down the high rate of interest which the lenders charged on short term loans. This was done to make sure that the money is lended to the person who is eligible to pay it back so that it does not trap them in a debt spiral.

8 things to consider before taking a payday loan

Consider institutions which grants instant loan 365 days a year, 24 hours a day, seven days a week. Throughout the day, in the middle of the night, and also on bank holidays. The finances you need will be in your bank account, within an hour after your application approval. Listed below are few key points borrowers must consider before taking payday loan.

• Instant decision and approval online
• No hidden fees or costs
• Low-interest rates and APR*
• Flexible funding and repayment terms
• Cash deposited in an hour
• Strict data protection
• FCA registered
• High acceptance rates

The borrower can borrow from an instant payday loan provider the amount between GBP 200 to 1100. Again in the year 2015 new laws came into force which

1. Lowered the interest rate as it caped rate at 0.8% per day.
2. Imposed fee on delay payment, this was done to secure the creditors from defaulted payers.

Laws in United States

Payday loan is a popular concept in the U.S. where this service was mainly for the blue collared workers or the daily wage workers who are in need of money during the time gap between the previous paycheck and the coming up paycheck. States in the U.S. have their own legislations on payday lending, some of the states have completely banned high rated interest on payday lending and some of them have capped the rate of interest which the lender can charge from the borrower.

India’s next step

Payday loans are described as loan sharks in the UK and US as they seem payable but with time it becomes a threat. In the year 2017 the payday loan market in India was estimated to be at USD 10.7 billion but what is to be worried is that if these loans turn out unpaid. The rate of interest which is 1% per day could become a burden on the borrower if the loan remain unpaid for more than 30 to 40 days. The startups are meeting the aspirational needs of the young generation but there is requirement of proper laws that this sector does not turn itself into a NPA.